Wednesday, February 6, 2013

Housing Optimism Premature.

 Yes we are assuming that the past informs the present. However I want you to look at this chart that I have posted from the second item. Fundamentally the new generation has adopted the condo lifestyle close to their work. The trend is moving against the single family dwelling model for efficiency sake.

Thus Shiller is right that optimism may well be misplaced and we could be seeing a new life way taking shape that backs of from the massive commitment that a single family home demands.

Cities are also waking up to the Vancouver model in which modern condos are all stuffed downtown to completely revitalize the region. Add in rapid transit to satellite hubs and the car is off the road.

In Vancouver the traffic entering the core has stagnated for years because of this while the population of the core has surely doubled.

SHILLER: All This Housing Optimism Is Way Too Premature

Henry Blodget and Lucas Kawa | Jan. 25, 2013, 4:36 AM

Yale professor Robert Shiller is one of the pre-eminent experts in house prices.

Shiller created the "Case-Shiller Index," which tracks changes in house prices on a monthly basis and is the most closely followed house-price index in the country.

We sat down with Professor Shiller in Davos to get his take on the future of the housing market.

Henry Blodget: Everybody in the U.S. seems convinced that the housing market is going to come roaring back, it’s going to save the economy, house prices are going to rise, houses are a great investment again. Are they right?

Professor Shiller: First of all, I challenge your statement a little bit. The Pulsenomics survey of experts – they had 105 experts in their December survey – and not one of them predicted a return to the boom that we had. The most optimistic had a real return for the next 4/5 years of something like 6 percent.

Blodget: But that’s way better than zero.

Shiller: I’m taking the most optimistic out of 105. We also had – what’s that perma-bear guy, anyway, we had someone at minus 10 percent. I think that we may be recovering, but I also think that we may have further real price declines in the coming years.  People are overly – we tend to focus on the latest starts and permits and other indicators, but I think that there might have – and this isn’t a confident forecast – but there might have been a decline in our appreciation of this American Dream: detached, dispersed single family homes – you have to drive for 45 minutes to get there from your job. And the idea has gone, well it’s not gone, but it’s diminished – that this would be a good investment. So the latest data, ever since the crisis, almost all new housing has been rental. New household units want rentals. If that’s a trend, it means that home prices of single-family detached homes should probably go down, because it’s hard to maintain those as rental units. If people demand that kind of – I think they’ll sell at a discount. Co-ops and condos could have a different trend at the same time.

Blodget: So what is your sense of the next five years? Do you think we’ve hit bottom in the housing market or do you have to stratify it that way?

Shiller: I think that we might have [hit bottom], but my biggest sense is that probably nothing dramatic happens either way. If the Pulsenomics survey is right, and it’s up between 1 and 2 percent real, that’s plausible to me. But also down 1 or 2 percent real, that’s plausible. I’m sorry I don’t have a more precise forecast.

The Case-Shiller Index.

Blodget: One of the things I feel that people might be missing is that if the economy does return to strength, at some point presumably interest rates will start to rise to more normal levels which will change the cost of mortgages and make them much more expensive. How much do you think the cost of mortgages affects the price of housing, and if interest rates do go from 4 now up to 7 percent, will that dampen house prices?
Shiller: It would seem from economic theory that it ought to. If the 10-year Treasury goes from 1.8 percent to 7 percent, that means mortgage rates will go from 3.5 to 10 percent, or something like that. And that ought to affect home prices. And in a very broad sense, that seems to be the case. Home prices reached a low in the early 80s, right around the time Paul Volcker pushed interest rates up. But on the other hand, it doesn’t fit very well, this whole model. Home prices don’t look like an inverse of interest rates.

Blodget: They don’t? You’ve studied it hundreds of years of home prices and you haven’t seen a correlation between the two?

Shiller: No, in fact if you look at the path of interest rates since Paul Volcker, interest rates have just gone down secularly for 30 years. It’s absolutely amazing, how strong that downtrend is. And it’s hit practically zero, it’s at a record low right now. It can’t keep going down, so now where is it going to go from here? I don’t know. I don’t see as much commentary on this trend. Somehow, there was a turning point, a major turning point with Paul Volcker, that we went from an economy of increasing inflation to decreasing deflation, and not many people appreciated how profound that transition was. But now, the question is where are we going now when we’ve hit record lows. I wish I knew.

Blodget: Well, presumably there are two options. Either we’re Japan and rates stay low for 20 years, or they go back up.

Shiller: The question is attaching probabilities to those scenarios.

Blodget: Do you want to take a stab at that?

Shiller: I don’t know. This is something that, Bayesian statisticians have tried to represent ignorance by probabilities, and this is why my son is a philosophy Ph. D candidate right now, and he’s interested in how to represent uninformative priors. There’s all kinds of paradoxes when you try to do it. So we just don’t know, and I can’t attach a probability.

Blodget: Thanks, Professor Shiller.

This item comes from an investment newsletter and the chart tells it all.

Breaking: We Hit the Peak in 2005!

By Jeff Siegel | Monday, January 28th, 2013

62 miles.

This was my mother's daily commute for about two years after we moved out to the suburbs in 1981. Total transit time was about three hours round-trip, depending on traffic, of course.

So basically, my mother spent about two and half days' worth of time every month driving to and from work...

Two and a half days!

Fortunately, she only had to do that commute for a couple of years before getting reassigned back to the main office, which was much, much closer to home. But it was around that time I realized I would never put myself through that kind of hassle.

It just made no sense... the wear and tear on the car... the stinging fuel costs... the wasted time and productivity... the stress of daily traffic...

No, this was never something I wanted. And after college, I made a conscientious effort to never live more than ten or fifteen minutes from work. Anything more would just be unacceptable.

And as it turns out, I wasn't alone. Over the past ten or fifteen years, there's been an interesting shift in behaviors regarding daily work commutes. And what was once considered just a part of a daily routine has started to become an exercise in futility.

The mere thought of spending a significant amount of one's life behind the wheel of car, sitting in traffic and starting the day completely stressed out has sparked a migration back to some of this nation's cities — at least, for a younger generation that works within city limits.

And this has led to some folks not even needing a car anymore, as biking, mass transit, and carsharing services like Zipcar are making it easier for daily commuters to live without a car.

This new trend not only represents a complete reversal of the car-centric society in which I grew up, but some believe it could actually be one of the reasons behind what some are now calling “Peak Car.”

New Trends

There was an interesting article a couple of weeks ago by business and policy writer Tim Fernholz in which he considers the possibility that demand for cars has hit a plateau and, from this point forward, demand can only start to decline.

It's an interesting thought. But on the surface, it's a hard one to buy.

That being said, there has been a visible trend in vehicle miles traveled that could lend itself to Fernholz's argument. According to the OECD, growth in total vehicle miles traveled in the developed world has actually been decreasing steadily since the early part of this century...

In his piece, Fernholz attempts to justify this data with a few solid explanations that are at least worthy of consideration:

  1. Increasing costs of fossil fuels, parking, and insurance at a time of stagnant wage growth in advanced countries.
  2. Policies designed to mitigate pollution and reduce urban sprawl.
  3. Availability of communications technologies that has made some work travel unnecessary.
  4. New trends toward urbanization replacing the flight to suburbs.
  5. A new generation of potential car buyers — specifically those in the Millennial generation — that doesn't view cars as rights of passage or status symbols, as previous generations have.
  6. The inability for people to tolerate daily commutes for more than an hour.
The World's Longest Traffic Jam

Of course, current trends that can make a supportive argument for the case of "Peak Car" do not reflect the full global scenario...

Many automakers today are looking towards emerging markets for continued growth, and certainly we've seen evidence of this in China, India, and a few South American countries.
The question, however, is will these emerging economies embrace car-centric communities as we have done in the United States?

Car ownership in emerging economies is definitely viewed as a status symbol. And having this certain taste of freedom that we've grown so accustomed to in the U.S. is still very new in other parts of the world, and offers a tremendous amount of enthusiasm over car ownership.

Then again, with the significant availability of cars comes some of the hassles, too — particularly when it comes to fuel costs and traffic. Consider for a moment the world's longest traffic jam in history was in China in 2010: It stretched for 62 miles and lasted twelve days!

Truth is it's still too early to know exactly how car ownership will play out over the long-term in emerging economies. But here at home, we're already witnessing a transition to alternative forms of transportation and mass transit acceptance.

I can't say with absolute certainty that this could prove a "Peak Car" theory, but here's what we do know: There has been clear evidence of robust growth in mass transit ridership over the past 16 years.

According to the American Public Transportation Association, from 1995 through 2011, public transportation ridership increased by 34%, representing a growth rate higher than the 17% increase in U.S. population, and higher than the 22% growth in the use of the nation's highways over the same period.
Also worth noting, in 2011 Americans took 10.4 billion trips on public transportation — the second highest annual ridership number since 1957.

And as far as alternative forms of transportation, we know from the actions of automakers that the transition to more fuel-efficient vehicles, like hybrids and electrics, will continue; natural gas will eventually end up powering nearly all of our buses and trucks; and freight rail will continue to build market share, especially in the race to develop and secure this nation's oil and gas resources.

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